Minimal portfolio rotation in July

Executive Summary

Equity market volatility, relatively low in July, led to little in the way of portfolio rotation.

Kudos, in particular, go to the emerging markets, while, stateside, market performance is going from strength to strength. Only Europe is lagging, in absolute terms, although this owes much to the strong euro, whose rise has, for the most part, offset the relative and temporary weakness of the European markets.

Our equity-strategy geographical allocation is still overweight the Euro zone, the emerging markets and Japan, neutral the USA and underweight the UK.

European Strategy

The euro, higher than at any time since 2015, is detracting from equity performance

The European stock markets delivered a balanced performance in July, with a particularly strong euro 10% higher than at the start of the year.

Telecoms outperformed the European market as a whole, after a period of striking underperformance. As the sector does not, however, look an outstandingly successful medium- or long-term bet, it remains underweighted in our strategies.

The banking sector and Technology, both still on an upward trend, represent our main European overweights and, as such, have enhanced the performance of most of our strategies.

A month back, we cut our Healthcare overweight, luckily, as it turned out, as the market would seem to have followed suit via a wave of profit-taking, making the sector July’s worst performer.

US Strategy

A Technology-inspired July another solid month

The US markets, driven mainly by Technology, again delivered an almost 2% performance in July

Our overweight in the sector was again a prime influencer of performance.

Telecoms also performed well, surprisingly so, given the sector’s weak growth prospects. The rebound is most probably technical in nature and the result of one-off events such as Verizon’s better-than-expected results.

Energy was the biggest loser, due to the decline in the oil price, which seems to be mired in an impasse in spite of the receding differences in company rankings (which can be a sign of an uptick in demand).

US corporate results were, on the whole, pretty good, with almost 75% of companies publishing results that confounded market expectations.

The current USD weakness could impact certain stocks; tactically, we are u/w Consumer Discretionary and have reverted to neutral on Consumer Staples. Apart from that, our tactical allocation strategy remains largely unchanged:

We remain neutral Financials, which we’ll continue to keep a close eye on.

We are maintaining our u/w on sectors of little potential, viz., Telecoms and utilities.

Besides Telecoms, which we are avoiding like the plague, there has been a lot of catch-up and sectors are much of a muchness, more so than in recent months, as regards both over- and underweighting.

Energy stocks have too little potential for them to be considered a good buy.

Technology remains a medium-term option, as exemplified by its July performance.

Emerging Market Strategy

China and Brazil the best market performers in the best-performing market in July.

The emerging markets outperformed all other regions for the seventh straight month. A booming Chinese economy, commodity-price stability and strong local currencies were all, in one way or another, behind July’s reported over-6% performance.

China and India are out in front in Asia, following good macroeconomic data.

Brazil rebounded massively after the central bank announced it was cutting its key interest rate. Our analysts are keeping a close watch on Brazil in view of recent political tensions; fortunately, the decision to remain neutral helped us benefit from the recovery.

Russia, still handicapped by US-imposed political sanctions, nonetheless put up a good performance over the month.

Our allocation remains unchanged:

We remain u/w Telecoms, lacking in potential.

We are sticking with our cyclical bias, particularly vis-à-vis Technology, to continue to benefit from the positive global climate.